An Economic Solution For Miami-Dade County: A Publicly-Owned Bank!

An Economic Solution For Miami-Dade County
Farid A. Khavari • investmentwatchblog.com • December 15, 2010

…Simply put, anywhere you look, there is just not enough money.

Fortunately, there is a permanent solution to Miami-Dade County’s economic problems which will also benefit every county resident and make Miami-Dade County recession-proof forever. The solution includes reducing reliance on tax revenues, while lowering and finally eliminating property taxes by 2015. MDC’s government can earn more revenue than ever before, by providing services which lower the costs of living for its residents.

The results of this solution will be massive job creation without subsidies, a stable and affordable housing market, and unprecedented prosperity as everyone’s costs of living are reduced. MDC will have a permanent budget surplus without cutting jobs or salaries.

The cornerstone of this solution is to create the Bank of Miami-Dade County, owned by the county and operated for the benefit of the people of MDC. This bank can be established at no cost to the taxpayers, and earn billions of dollars per year for MDC’s treasury, while saving MDC residents even more billions per year in interest costs.

A publicly-owned bank is not unprecedented. The State of North Dakota has owned a bank since 1918. North Dakota has the lowest unemployment in the U.S. (less than 4% compared to MDC’s 13+%), and a budget surplus of over $1 billion, because they do not rely on Wall Street for money. MDC can do even better.

Read the entire post here.

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12 Responses

  1. There he goes again! Dr Kavari says:

    “Under the same Fractional Reserve regulations that govern all banks, the Bank of Miami-Dade County can create $900 of new money through loans, for every $100 of new deposits.”

    Dr. Kavari keeps saying this, and it is just not true. He intends to fund the loans of a publicly-owned bank this way. If he proposed funding those loans with the gold to be found in pots at the ends of rainbows, he would at least be proposing something that everyone understands. Instead, he proposes something equally mythical but not widely understood.

    As much loan money was created by banks lending 9X their deposits last year as there was gold found in pots at the ends of rainbows. In both cases, zero.

    Dr. Kavari does a disservice to the excellent idea of establishing a publicly owned bank by continually flogging this untruth. Proof? He could name just one bank that does what he says is common in banking: that banks lend 9X their deposits. He can’t. Because there are none.

  2. The money supply consists of “state money” and “bank money,” also known as “credit money.” The Fed creates “state money.” (The Treasury issues coins that are also considered “state money.”) Banks create “bank money” out of thin air, by bookkeeping entry when they issue loans, or “bank credit.” When deposits come into a bank, except for cash, they represent a transfer from one bank to another. The banks settle these deposit transfers by transferring reserves, in their account at the Fed, in “state money.” The “monetary base” in state money, serves as the basis for all the “bank money” that banks create, at some multiplier! It may not be 9, but the entire amount of “bank money” is a multiplier of the monetary base in “state money.”

    An excellent explanation of all of this can be found at the following link.
    http://www.accesscapnw.com/downloads/money_basics.pdf

  3. Ann –

    Yes, it fast gets complicated. But we are not talking about something complicated, like the monetary base. We are talking about something simple, like whether banks routinely lend a multiple of their deposits.

    There are some 8,000 banks in the US, and almost all publish publicly available annual financial reports. My contention is simple: no more banks lent even two times their deposits last year than there were pots of gold found at the ends of rainbows. In both cases, the actual number was zero.

    The notion that banks lend multiples of their deposits is as mythical as the pot of gold to be found at the end of a rainbow.

    Ann, you or Dr. Khavari could easily disprove this contention by naming just one bank whose loans are twice its deposits.

    (BTW – a lender CAN lend more than its deposits. Pay-day loan companies and pawn shops take no deposits at all, fund their loans otherwise, either with loans or net worth. But banks are depository institutions who routinely lend out 90% of their deposits, and banks fund their loans almost totally with deposits. But not at 9X or even 2X. Because they can’t.)

  4. Tom,
    No, what we should be talking about is banks lending a multiple of their RESERVES. Loans generally balance deposits. The multiplier is on the RESERVES. Reserves are in “state money,” held in the bank’s account at the Fed and in vault cash.

    From the above link and also from http://wfhummel.net/index.html#2:
    “The money multiplier in its basic form is the reciprocal of the required reserve ratio. It is commonly thought to be a measure of how large the credit money supply will grow, given the amount of base money created by the Fed. In truth the amount of base money depends on the amount of bank credit issued, not the other way around, as will be explained. The money multiplier is little more than an after-the-fact observation of the multiple. Indeed the money multiplier can have no meaning in the many countries where there is zero reserve requirement on banks.”

    The RATIO of the amount of BASE money to the amount of BANK money issued.

  5. Tom, is your disagreement in that the banking system as a closed circle can end up creating 9x vs. A bank? In that to get to the $900 in loans, you start with $100 and lend $90, the $90 is deposited and $81 is lent until we reach our total of $900, and each time the remainder is deposited reserves must be transferred. Will either of you clarify as a teaching example? Thanks

  6. Ann –

    You are right that banks lend a multiple of their reserves. But that is not what Dr. Khavari is saying. Again, here is his quote:

    “Under the same Fractional Reserve regulations that govern all banks, the Bank of Miami-Dade County can create $900 of new money through loans, for every $100 of new deposits.”

    This is flat out false. Dr. Khavari intends to restore Florida’s econmy and make a profit to boot by paying higher interest on deposits than he collects on loans. This is as fantastical as saying it can be restored with gold retreived from the ends of rainbows.

    The sooner this kind of nonsense stops the sooner serious efforts to establish publicly owned banks can gain traction..As long as looney tunes proposals like this are given currency by public banking advocates they leave themsevles open to the charge that they are bubbleheads who can be ignored.

    I repeat, if banks commonly lend multiples of their deposits, please list a few who do.

    The monetary reform movement would be better off never mentioning credit money, base money, or “the magic of fractional reserve banking”.

    The reason public banking is superior and necessary is simple: it returns interest payments on loans to the body politic rather than to a few coupon clippers at the top, so it avoids the ever growing inequality of the present system, with its consequent instability.

    Tom Hagan

  7. Tom,
    Khavari is saying $900 of new money for every $100 of NEW deposits. The NEW is the key. Remember, if Florida were to create a state-owned bank, it would transfer all of its deposits in Wall St. banks to its own Bank of the State of Florida bank. Such a transfer would yield a transfer of reserves in that amount to the BSF’s (Bank of the State of Florida’s) account at the Federal Reserve. So, along with those reserves, the Florida state-owned bank would be able to support 9x that amount in loans. Now, the system has already mutliplied the amount of base money by 9x. BUT, Florida could TAKE ITS share of that money as it has taken its share of RESERVES.

    AnnT

  8. Ann –

    You claim that banks routinely place loans of 9X their deposits.

    I say that if banks could do this they would, but they can’t so they don’t.

    Dr. Khavari says he is going to transform the economy of Florida by paying high interest on deposits and then lending 9X those deposits at low interest.

    I say this is impossible, a myth threatening to the Public Banking movement since it allows its enemies to hold Public Banking up to ridicule.

    You can easily prove me wrong, not with an elaborate explanation of how it can be done, but just by naming a bank whose loans are a multiple of deposits.

    Please name just one bank who’s loans are a multiple of its deposits.

  9. Ann –

    You claim that banks routinely place loans of 9X their deposits.

    I say that if banks could do this they would, but they can’t so they don’t.

    Dr. Khavari says he is going to transform the economy of Florida by paying high interest on deposits and then lending 9X those deposits at low interest.

    I say this is impossible, a myth threatening to the Public Banking movement since it allows its enemies to hold Public Banking up to ridicule.

    You can easily prove me wrong, not
    with an elaborate explanation of how it can be done, but just by naming a bank whose loans are a multiple of deposits.

    Please name just one bank whose loans are a multiple of its deposits.

    Tom Hagan

  10. Tom, you write: “You claim that banks routinely place loans of 9X their deposits.”

    That is NOT what I am saying and that is NOT what Khavari is saying!

    What we are saying is that the amount of “bank money” created can be 9x of a NEW deposit. Here’s the example of wikipedia, assuming a reserve requirement of 20%, so the factor is 4x.
    http://en.wikipedia.org/wiki/Fractional-reserve_banking

    Table Sources:[18][19][20][14]
    Bank Amt Deposited Lent Out Reserves
    A 100 80 20
    B 80 64 16
    C 64 51.20 12.80
    D 51.20 40.96 10.24
    E 40.96 32.77 8.19
    F 32.77 26.21 6.55
    G 26.21 20.97 5.24
    H 20.97 16.78 4.19
    I 16.78 13.42 3.36
    J 13.42 10.74 2.68
    K 10.74
    TOTAL 457.05 357.05 89.26

    Total Amount of Deposits: 457.05

    Total Amount Lent Out: 357.05

    Total Reserves + Last Amount Deposited: 100

    So, the state-owned bank is Bank A in this example. It has an initial deposit of $100 (and associated amout of $100 in reserves at its Fed account).

    This amount of reserves has been spread throughout all the local banks A-I, and the total amount of bank money created by ALL the banks A-I is 4x of the initial deposit.

    THIS IS WHAT WE ARE SAYING, Tom.

    Notice that total deposits is approximately equal to total loans. No mystery here. It’s like saying 1+1=2.

    Ann

  11. Ann –

    Further to my post of earlier today –

    A quote from the Wikipedia article you cite:

    “Banks make a profit based on the difference between the interest they charge on the loans they make, and the interest they pay to their depositors. Since a bank lends out most of the money deposited, keeping only a fraction of the total as reserves, it necessarily has less money than the account balances of its depositors.”

    This means two things: 1) Banks re-lend the money they have on deposit, but only a fraction of it. Not a multiple of it. They retain some of it as cash reserves. 2) They profit by lending money at a higher interest rate than they give on deposits. To do otherwise would be to lose money, not make profits.

    But Dr. Khavari is going to give 6% on deposits, charge 2% for loans, and make a profit. Can’t be done.

    Then to the table you cite. Indeed, Deposit A starts the ball rolling. But note that deposit A is not any ordinary deposit, it is a deposit by the central bank – the Fed – of money it has created from nothing. And indeed the “money multiplier” fans that Deposit A up, in this example, by 4 to 1. A deposit of “New Money” means money from the Fed. But only from the Fed.

    The “money multiplier” works on money the Fed injects into the system, but not on any other deposits. For any given bank, loans never exceed deposits. Because banks can only lend out what is deposited, less a reserve. So the “9 to 1” claim of money injected into the economy by a public bank is true ONLY for “New Deposits” – i.e., deposits coming from the Fed. Not all deposits.

    Think about it – if every deposit could be multiplied up by 9 to 1 for re-lending, why wouldn’t the system simply blow up when 9X a deposit is then lent out, redeposited, and then FURTHER blown up by 9X, and so on ad infinitem? What would stop the money supply from growing to infinity?

    Dr. Khavari’s Magical Money Machine is impossible.

    It is a disgrace that PBI lends it credence. Dr. Khavai’s claim that a public bank can lend 9X its deposits is a bubbleheaded idea. Publishing it leaves PBI open to dismissal on grounds that it represents the views of bubbleheads. For that reason I will not rest till I see all references to this nonsense expunged from the site.

    Cheers.

    Tom Hagan

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